Amid opposition from the European Parliament, the technical preliminary procedures have begun, for the signing of the intergovernmental treaty among those member-states of the EU that participate in the so-called “Banking Union”, through which the Single Resolution Fund for banks (SRF) will be established. The Fund is considered a key pillar of the banking union, given that it will be used for funding the resolution and liquidation of financial institutions of the Eurozone. The aim is to complete technical groundwork by early March, to approve the technical recommendations of the EU’s Economic and Financial Affairs Council (ECOFIN) and to join, later on, in the ongoing negotiation between member-states and the European Parliament regarding the single legal regime governing the liquidation of banking institutions. If all goes well, then the intergovernmental agreement will have to be ratified by the member-states of the Eurozone within 2014.
However, the reactions of the EP are focused on the fact that another major agreement, namely the establishment of the Resolution Fund, is not based on Community law, nor will be subject to control by the institutions of the Community, but rather will be governed by rules of the intergovernmental treaty that will be signed among member-states. It should be recalled that an intergovernmental treaty also applies to the functioning of the European Stability Mechanism (ESM), through which the Memorandum countries are funded. Moreover, the so-called “Fiscal Compact”, through which the contracting member-states are essentially bound in perpetuity to zero deficits in their budgets, is also not part of Community law. Moreover, all major parties of the European Parliament reacted vigorously to the agreement among member-states on the Single Resolution Mechanism for banks (SRM), whose function will not only be extremely complicated, but where decision-making will also be dominated by member-states.
Based on the information available to-date, the new regime will function in the following way: when the Single Supervisory Mechanism for the oversight of banks (SSM), which is bound to start operating in coming November in Frankfurt, under the aegis of the ECB, determines that there is a problem in one of the banks of the Eurozone or another state that participates in the banking union, then it will notify the Single Resolution Board (SRB) in Brussels. The details of how the Board will function remain under negotiation in the European Parliament, with a view to complete the legislative procedure in the course of the Greek presidency; of course, Greece will take the lead in negotiations on behalf of the member-states, as chair of the EU Council. In any case, when the Resolution Board decides (usually on Friday afternoons) that a particular bank is not sustainable and has to enter into resolution regime, then the cost will be borne by creditors and shareholders of the banks; additionally, from 2016 onwards, depositors with unsecured deposits (i.e. exceeding €100.000) will also be burdened with losses, according to the “Cyprus model”. If the participation of the creditors of the bank is insufficient to “pay the bill”, then the solution of last resort will be to use public resources. These resources will originally come from national funds of financial stability, which will in turn be funded by capital injections from the banks. Gradually, over a ten year period, national funds will be integrated in a Single European Resolution Fund (SRF) which, as pointed out above, will be established by an intergovernmental treaty. The pooling of funds will be done progressively, with a 10% annual transfer rate of funds to the European fund. In other words, 100% of the funds to be used in the first year will come from national funds, whereas after the eleventh year all available funds will have been pooled, which are bound to reach 1% of the overall insured deposits in the Eurozone, i.e. 55 billion € approximately.
In the meantime, if a bank -say Italian- goes bankrupt, after resorting to its shareholders it will have to address the national resolution fund, and only when this is exhausted will it be able to use funds that will have been transferred to the European Fund. Moreover, the national funds will probably be able to borrow from each other if contingencies arise. In case of a major banking crisis that will use up all resources of resolution funds, then the European Fund (and similarly the national funds, which will continue to exist for another decade) will be able to borrow from the European Stability Mechanism (ESM). However, banks will then be asked to pay back the loan, including additional levies. The question remains as to whether this “bridge-financing” by the ESM will be taken into account in the calculation of the debt of concerned states, which is the case today, or whether it will directly burden the national funds, according to the future regime of direct recapitalisation of banks.
The Timetable
The management of the complex legislative procedure that is required until the (temporary) completion of the Banking Union will be the main challenge of the Greek presidency of the Council of the EU, which started on January 1st and will be effectively terminated on April 17th, when the European Parliament’s activities will be interrupted for the European elections. The European timetable of the next months has the following structure:
January 27th, 2014: Eurogroup meeting in Brussels. Athens’ goal is the completion of the 4th evaluation of the Greek Adjustment Programme. A discussion will take place concerning the direct re-capitalization of the Eurozone banks by the European Stability Mechanism (ESM), without these funds being added to the public debt of States concerned.
January 28th, 2014: First Meeting of the Economic and Financial Affairs Council (ECOFIN), under the presidency of the Greek Minister of Finance. The banking union is the main subject on the agenda.
February 17th, 2014: Eurogroup meeting in Brussels. Possible completion of the 4th evaluation of the Greek Adjustment Programme (in case of non-agreement at the Eurogroup of January).
March 10th, 2014: Eurogroup meeting. Discussion concerning the possible exit of Portugal from the Memorandum and 3rd evaluation of the Cypriot Adjustment Programme.
March 20th, 2014: European Summit and Euro-Summit in Brussels.
April 1st-2nd, 2014: Informal Eurogroup and ECOFIN meeting in Athens. Possible discussion regarding the 5th evaluation of the Greek Adjustment Programme and launch of discussion to settle the Greek public debt, provided that in the meantime Eurostat has confirmed the achievement of primary surplus in the 2013 budget. Discussion concerning possible exit of Portugal from Memorandum and the 3rdevaluation of the Cypriot Adjustment Programme.
May 5th, 2014: Eurogroup meeting in Brussels. Continuation of discussion regarding the 5th evaluation of the Greek Adjustment Programme and the settling of the debt issue.
May 15th-16th, 2014: Possible European Summit in Brussels.
May 18th, 2014: First round of municipal and regional elections in Greece.
May 25th, 2014: European elections. Second round of municipal and regional elections in Greece.
June 19th, 2014: Eurogroup meeting in Luxembourg. Formal date set to take decisions regarding the Greek Adjustment Programme.
June 26th-27th, 2014: European Summit in Brussels and possible Euro-Summit.
June 30th, 2014: Termination of Greek presidency of the Council of the EU. In July or August the payment of the last installment from the current European Support Programme to Greece is expected. The installments from the IMF programme are planned to continue until 2016.